Frankenmuth Mut. Ins. Co. v. Keeley

• Citation: 433 Mich. 525,447 N.W.2d 691
• Decision Date: 19 October 1989
• Docket Number: Docket No. 81566
• Parties: , 58 USLW 2283 FRANKENMUTH MUTUAL INSURANCE COMPANY, Appellee and Cross-Appellant, v. Charles KEELEY, Appellant and Cross-Appellee.
• Court: Supreme Court of Michigan

Page 691

447 N.W.2d 691

433 Mich. 525, 58 USLW 2283

FRANKENMUTH MUTUAL INSURANCE COMPANY, Appellee and Cross-Appellant, v. Charles KEELEY, Appellant and Cross-Appellee.

Docket No. 81566.

Supreme Court of Michigan.

Argued Oct. 4, 1988.

Decided Oct. 19, 1989.

Rehearing Granted Dec. 19, 1989.

[433 Mich. 528] Jonathan Holt, of counsel, Fenton, Milton Lucow, Rosalind Rochkind (P23504) Garan, Lucow, Miller, Seward, Cooper & Becker, P.C., Detroit, for plaintiff, counter-defendant/appellee, cross-appellant.

Garan, Lucow, Miller, Seward, Cooper & Becker, P.C., by Rosalind H. Rochkind, Detroit, Jonathan E. Holt, Fenton, for appellee and cross-appellant.

Dean, Dean, Segar, Hart & Shulman, P.C., by Robert L. Segar, Flint, for appellant and cross-appellee.

OPINION

ARCHER, Justice.

We granted leave to appeal and cross-appeal to consider whether the trial court and the Court of Appeals correctly limited the nature and amount of damages that can be recovered by an insured when an insurer has breached its duty to settle a claim.

We hold that when an insurer has exhibited bad faith in failing to settle a claim on behalf of its insured, and a judgment in excess of the policy limits results, the insurer is liable for the excess without regard to whether the insured has the capacity to pay. Accordingly, we reverse the holding of the Court of Appeals and remand the case to the trial court for determination of damages in accordance with this opinion.

Facts

On or about May 7, 1978, Joey Guy Boone was visiting his friend, Charles Keeley, at the residence of Charles' mother, Mrs. Wilma Keeley. At some point during the day, Charles Keeley had placed his shotgun in open view in the living room. According to Joey's statement to the police, Charles was "playing around with" the gun, the gun discharged, severely injuring Joey Boone. Joey Boone was rendered a quadriplegic.

At the time of the shooting, Charles Keeley was insured with Frankenmuth Mutual Insurance Company. ¹ The policy provided coverage for Charles through his mother's contract of insurance.

In an effort to avoid the initiation of a lawsuit, settlement negotiations were conducted between counsel for Mr. Boone and counsel for the Keeleys, but no agreement was reached. As a result, on June 8, 1979, Joey Boone filed a negligence action against Charles Keeley and his mother, Wilma, in Genesee Circuit Court.

On the same date, Frankenmuth sought a declaratory judgment that the injury to Mr. Boone was "expected or intended from the standpoint of the insured." ² Frankenmuth asserted, therefore, that Charles Keeley's shooting of Joey Guy Boone was not covered under the policy. ³

Joey Boone and the Keeleys, having joined forces, counterclaimed, charging that the insurance company had refused, in bad faith, to settle the case, despite several offers made by Joey Boone's attorney to compromise for the policy limits, $50,000. They further alleged that Frankenmuth fraudulently and deceitfully represented to Boone's attorney that the policy limit was only $25,000. The countercomplaint requested any damages deemed appropriate by the court.

On July 6, 1981, the circuit court determined that Frankenmuth was responsible under the policy provisions to defend and, if appropriate, settle on behalf of the Keeleys. Meanwhile, in the principal case, the jury found Charles Keeley and Joey Boone equally negligent with total damages equaling $500,000. Thus, a judgment was entered against Charles Keeley in the net amount of $250,000, plus interest and costs.

Thereafter, Joey Boone and the Keeleys initiated an action to have their counterclaims brought to trial. Frankenmuth responded with a motion for summary disposition regarding each of the claims. ⁴ In resolving the motion, the court awarded Wilma Jean Keeley $4,152 in attorney fees. In so doing, the court simultaneously ruled that Frankenmuth exhibited bad faith in failing to settle the case. ⁵ More importantly, however, the court held that any damages owing to Charles Keeley with respect to Frankenmuth's breach of its duty to settle were necessarily limited to the amount that the injured party, Joey Boone, would have been able to recover from Charles Keeley absent the insurance coverage, i.e., the amount of Mr. Keeley's assets not exempt from legal process.

The Court of Appeals, in a unanimous decision, affirmed the ruling of the lower court in all respects. ⁶ However, the Court remanded the case for a determination of the extent of Charles Keeley's assets not exempt from legal process, and for entry of judgment against Frankenmuth in that amount. We subsequently granted leave to appeal. ⁷

I

The substantive issue brought before the Court by the appellant, Charles Keeley, was acknowledged in this state six decades ago. Wakefield v. Globe Indemnity Co., 246 Mich. 645, 225 N.W. 643 (1929), involved an action brought by the City of Wakefield against its liability insurer, Globe Indemnity, for the company's failure to exercise reasonable care in effecting the compromise of a tort claim brought against the city, ⁸ and for the company's bad faith in refusing settlement. ⁹

With regard to the specific question whether Globe Indemnity had to pay the excess judgment, the Wakefield Court did not have the opportunity to directly answer. In dealing with the bad-faith issue first, ¹⁰ the Court ruled that the insurer was not liable to its insured for refusal to settle unless refusal was in bad faith. Hence, because the Court did not view the actions of Globe Indemnity as constituting bad faith, it reversed the trial court, remanding for judgment in favor of Globe, leaving the damage issue substantively undecided. ¹¹

Nonetheless, within its text, Wakefield recognized the issue addressed in the case at bar:

"The courts seem to be unanimous in the opinion, as expressed by direct ruling, recognition, or assumption, that the insurer is liable to the insured for an excess of judgment over the face of the policy when the insurer, having exclusive control of settlement, fraudulently or in bad faith refuses to compromise a claim for an amount within the policy limit." Wakefield, supra 246 Mich. at 648, 225 N.W. 643.

In the years that followed, Wakefield supplied the standard upon which courts in Michigan relied when facing allegations of bad-faith failure to settle on the part of insurance companies. In Commercial Union Ins. Co. v. Medical Protective Co., 426 Mich. 109, 116, 393 N.W.2d 479 (1986), this Court cited Wakefield, reasoning:

"[A]n insurer is liable to its insured for a judgment exceeding policy limits when the insurer, who has exclusive control of defending and settling the suit refuses to settle within policy limits in 'bad faith.' " ¹²

II

There are two schools of thought regarding the remedy for an insurer's bad-faith breach of its duty to settle. The jurisdictional split is distinguished by the following doctrines: the prepayment rule and the judgment rule. The older prepayment rule is the doctrine, adopted by a minority of jurisdictions, which dictates that an insurer may be held liable in an "excess" case only if part or all of the judgment has been paid by the insured. The judgment rule, adopted by a majority of jurisdictions, commands an insurer to pay an excess judgment in instances of bad faith, so that the insured need not make any payment nor have the capacity to pay any part of the judgment in order to recover the excess amount from the insurer. See Carter v. Pioneer Mutual Casualty Co., 67 Ohio St.2d 146, 423 N.E.2d 188 (1981).

The cases relied on by the appellants clearly reveal the vigorous dichotomy of the courts in their analyses of the doctrines. For example, in Wolfberg v. Prudence Mutual Casualty Co., 98 Ill.App.2d 190, 196, 240 N.E.2d 176 (1968), the Court recited:

"The majority view in this country is represented by Jenkins v General Accident, Fire & Life Assurance Corp, 349 Mass 699, 703; 212 NE2d 464, 467 (1965), which stated:

" '... Despite some conflict in earlier cases, the weight of authority is that it is not necessary for the insured to allege that he has paid or will pay a judgment in excess of the policy limits in an action against the insurer for breach of its duty to act in good faith....' " ¹³

(Citations omitted.)

The court in Purdy v. Pacific Automobile Ins. Co., 157 Cal.App.3d 59, 74, 203 Cal.Rptr. 524 (1984), expressed the deterioration of the minority viewpoint:

"The 'prepayment rule' has in fact been relegated to the past in a majority of American jurisdictions, due primarily to the perceived inequity of an insurer's being permitted to capitalize on the weakened financial condition of the insured, ... In California, damages in the amount of the excess judgment are, without further demonstration, the measure of recovery for bad faith failure to settle."

In Dumas v. State Farm Mutual Automobile Ins. Co., 111 NH 43, 45, 274 A.2d 781 (1971), the New Hampshire Supreme Court reasoned that the prepayment rule could no longer be considered fair or judicious:

"A policy argument against our present rule is that it serves as a windfall to an insurer fortunate enough to have insured an insolvent. (Citation omitted.) In any event, the statement that an insured has not been damaged because he cannot pay the excess judgment is based upon the fallacy that damaged credit and financial ruin are not injuries." ¹⁴ Conversely, the United States Court of Appeals for the Second Circuit argued against the judgment rule and its accompanying theories in Harris v. Standard Accident & Ins. Co., 297 F.2d 627 (CA2, 1961). That court did not agree with the notion that insurers would receive a windfall upon a declaration of bankruptcy by its insured. The court opined that an insurer receiving premiums upon the face amount is subject to payment of that amount regardless of the insured's financial condition. Further, the court attempted to rebut the notion that adoption of the prepayment rule would make...